Comparative Analysis of the Datar-Mathews Real Options Method and Simulation Decomposition for Strategic Environmental Decision-Making

This paper contrasts the Datar–Mathews real options method with Simulation Decomposition (SimDec) across three environmental investment cases.

The analysis shows that the two approaches answer fundamentally different questions. Real options are well-suited for pricing explicitly defined flexibility (e.g., contractual clauses or expansion rights). SimDec, in contrast, decomposes simulation outputs to reveal which variables and combinations of variables actually drive project performance.

The results indicate that global sensitivity analysis is more informative during exploration and project planning stages, while real options valuation is most appropriate when a precise monetary price for flexibility is required.